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Analysis: POS finance in decline

Finance deals are still among the most effective tools dealers can use to attract potential customers into the showroom.

Research published last month by GMAC Financial Services, the financial arm of General Motors, found that 0% deals outweigh other marketing initiatives such as cashback, extended warranties or free accessories when car buyers are considering their next purchase.

The survey found that one-third of customers rate 0% finance deals as the most powerful incentive and yet it seems that dealers are still not utilising this tool to its maximum potential and losing out to direct lenders in the process.

This is having a knock on effect on the finance houses, which are seeing their business in the motoring sector drop. Singer & Friedlander’s recent decision to sell its consumer vehicle finance book to Close Motor Finance was, according to chief executive Tony Shearer, prompted by increasingly difficult market conditions.

"We haven’t made the financial returns from this book of business that we can get from the other parts of our business. It’s a combination of things. Motor finance is an increasingly competitive market and we are a small player," he says.

Direct lenders, who entered motor finance in the late 1990s, are now taking an estimated 9% of the point of sale (POS) finance market each year, worth several billion pounds. This is a profit opportunity that dealers should be taking advantage of, but can they compete effectively against direct lenders?

"The main issue is definitely the impact direct lenders are having on the industry by offering low rates. This is clearly affecting the dealers ability to deal with non-captive customers," says Phil Stones, managing director of Black Horse Motor Finance, the sector’s largest lender.

The problem appears to be that direct lenders are able to offer lower rates than dealers, but the dealers themselves have a part to play in this.

"We offer rates which are just as competitive as the direct lenders,” says Stones. “Dealers put a mark up on the rates we offer them, but this then increases the net rate to customers and can make us uncompetitive. This backfires because they lose out on business. I want them to earn commission, but I want them to be sensible with it."

Consequently dealers’ finance penetration has been falling year on year for the past eight years and now only 2.8 out of every 10 customer entering a showroom with the intention of buying a car on finance, actually purchase it point of sale.

Finance penetration should be in the region of 50% of car sales, but fewer than 10% of dealers achieve this level of success. Less than 30% are likely to be achieving between 30-40% penetration, with the remaining 60% between 5-30%.

These figures make grim reading for the retail sector, but are of even more concern for the finance houses. They are now warning that dealers could see the profits derived from finance dwindle away unless they take drastic action and change the way they approach selling it altogether.

"This is an opportunity for the finance companies. Dealers are not doing the job properly and are allowing their customers, and our customers, to drift away. We are looking to modify our approach to the POS customer more in line with the approach taken by the direct lenders," says Stones.

This isn’t merely scare tactics or empty rhetoric from Stones, it’s a reality he is already seeing in the marketplace. He was the first to put his head above the parapet and talk about the meltdown dealers are facing but was concerned at the negative feedback he would get.

"I was initially worried that they wouldn’t understand where I was coming from. But I’ve had a lot of contact with dealers and they have told me that in the cold light of day – this is a reality. The dealer market now needs to recognise that this is a vital income stream that needs rejuvenation from themselves as well as the finance companies."

Where the direct lenders are winning the battle for customers is in their advertising and marketing. The public is continually bombarded with mailshots and TV commercials from lenders, promoting their low headline rates, but this doesn’t tell the whole story.

Compare the headline rates with the rates available over the phone or via a direct lender’s website – it’s unlikely they will be the same.

Low headline rates are designed to attract the customer, and they have been highly successful in achieving that aim, broadening the perceived gap between direct lenders and dealers.

As POS finance penetration has been falling, income has also dropped. To combat the reduced F&I profits, some dealers have started charging their existing customers more. Wrong move: rather than penalising their loyal customers by upping rates, they should be spreading their customer base by increasing their portfolio but taking less out of each sale.

"Dealers need to focus on their ability to maintain their income in the long term. Once a customer goes to a direct lender, it is incredibly difficult to get them back," says Stones.

The threat facing the finance companies is obvious and there is unlikely to be a ‘quick fix’ solution that will solve the problem overnight. One way they can compete is to revise the method in which they credit score potential customers.

Direct lenders achieve their success on the back of a ‘rate for risk’. This is worked out on a credit scoring system – the highest scoring customers get the best rates and vice versa.

In point of sale finance, rates are calculated depending on the vehicle itself, and its age.

Customers buying vehicles that are up to two years old are offered the best rates, as they are seen as the best quality customers. As the vehicles increase in age, so do the rates.

"I think it is time for the industry to change and look at how other financial institutions are making their risk assessment on the customer rather than the goods. We have built a business around the car and supporting the motor dealers. While we should take a fresh look at the way we do business, dealers should also take a good look at their part in this cycle. We have to do something now but it takes two to tango," says Stones.

As well as having the right approach to finance, having the right people in place is crucial if dealers are to maximise their finance penetration. According to GE Capital Woodchester managing director Richard Gaskin, this might mean looking outside the traditional circles.

"Making the right investment in people is crucial but I believe that another important point is to start recruiting outside of the motor industry. These recruits can break the mould by bringing with them experience and new thinking from other industries," says Gaskin.

"Why isn’t there more encouragement for women to work in this industry, particularly at dealership level? Research has shown that female consumers find the environment in dealerships intimidating. Wouldn’t having more women staff help to alleviate this problem and maximise opportunities from this significant group?"

Gaskin believes that dealers need to invest in their sales staff to ensure they can offer a personal, trusted service and can understand the customers requirements along with being able to introduce the right product for the right customer.

"I don’t believe dealers are losing business merely because the direct lenders have improved their services, but because we have lost sight of the huge advantages dealers have over direct lenders," he says.

"They have the customers in front of them at a crucial stage of the buying process. With the right approach from both the finance provider and the dealer, no one can compete with that advantage.

"In the main, dealers and finance providers are struggling to accept that we are doing the same things that we have always been doing and that we are too easily swayed by arguments that we are just ‘victims of the market’."

Gaskin says it is essential that automotive retailers make changes and improvements and introduce real differentiators.

"If a dealership wants to make point of sale finance a success, it needs to devote greater focus to understanding its customers and their needs and to develop staff to enable them to meet these needs and expectations," he concludes.

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